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Code Section 409A: Limited Relief From Documentary Compliance this Year

Client Advisory

November 5, 2007

The Internal Revenue Service has extended to December 31, 2008, the date by which non-qualified deferred compensation (“NQDC”) plans and arrangements must be amended to reflect Internal Revenue Code Section 409A. As stated in our Client Advisory, “Code Section 409A Compliance: What to Do before Year End,” the Service had previously set December 31, 2007 as the date by which the documents of all such plans and arrangements would have to conform to the requirements of Section 409A. The IRS bowed to pressure from the business and legal communities to extend compliance relief. Accordingly, the “written designations” required this year under Notice 2007-78 are no longer necessary.

This development affects documentary compliance, but NQDC plans must nevertheless be operated in good faith compliance with Notice 2005-1 and the Section 409A final regulations.    The Service’s new guidance, Notice 2007-86, generally provides that

  • plans have until December 31, 2008 to effect new payment elections for previously deferred compensation which conform to the time and form of payment rules of Section 409A, but may not make payments pursuant to non-conforming provisions, and may not, by modification of an election, accelerate payments not otherwise payable into the year of the election (or further defer payments otherwise due in the year of the election); 
  • a non-conforming definition of a “good reason” termination of employment in an employment agreement (or severance plan) that is modified by December 31, 2008 may be treated as an involuntary separation from service, and, therefore, eligible for distribution under the so-called short-term deferral exception to Section 409A (or the severance plan exception to Section 409A);
  • payment elections under a NQDC plan that are linked to payment elections made under a tax-qualified retirement plan as in effect on October 3, 2004 are permitted until December 31, 2008; and
  • discounted stock rights may be replaced with non-discounted stock rights until December 31, 2008 under certain circumstances.

Given the complexities of revising NQDC plans to conform to Section 409A, this compliance postponement was predictable and very necessary. Sponsors should continue to review existing NQDC plan documents (including, among other arrangements, employment, change in control and separation agreements) to determine what company decisions and documentary changes need to be made during this extended relief period. It is unlikely that further relief will be granted by the Service. 

For a brief summary of Section 409A requirements, please refer to our prior Client Advisory “Code Section 409A Compliance: What to Do before Year End,” posted on CL&M’s website. 



Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2017 Carter Ledyard & Milburn LLP.
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